Fiat, Ford and Ferrari

The struggling Fiat Auto has announced an alliance with the Ford Motor Company to make small cars. Lapo Elkann, one of the Agnelli Family and a man who is in charge of brand promotion at Fiat confirmed the deal in a radio interview in Italy.

The new cars will be built using the platform of the Fiat Panda will have the same basic design but will be very different and would be badged as the new Fiat 500 and as Ford's replacement for the Ka. By working together both companies hope to reduce development costs and introduce economies of scale and thus make very competitive products.

This appears to overlook the problem, highlighted by no less a figure than Henry Ford II, who once famously remarked that "small cars mean small profits". However Ford and Fiat are betting that if they can sell enough cars they will make big profits. They are betting that the rising price of gas in the would will turn the car buyers towards more fuel-efficient machinery.

It remains to be seen whether or not the alliance between the two companies will develop beyond this one-car deal but it is worth noting that Ford's rival General Motors recently paid $2bn to get out of a deal with Fiat.

It may also be worth noting that 40 years ago Ford attempted to buy Ferrari but negotiations broke down over control of the racing programme and in the end Ford began building its own competition car, the GT40.

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